A critical skill for any investor is the ability to spot a financial scam when presented with one. Unfortunately, all too many investors are fooled every day – don’t let yourself become a victim!
While investment fraud can come in all shapes and sizes, there are five notable “red flags” you should always watch out for when looking at an investment.
Promise of High Returns
The first is any promise of high returns with virtually no risk. ALL investments carry some degree of risk, and generally speaking, greater returns come with taking on MORE risk. You’ll also want to avoid any investment that “guarantees” you’ll receive certain high returns.
Unregistered Investment Representative
The second flag to be aware of is whether or not the person offering you the investment is a registered and licensed investment representative. Thankfully, the SEC has made this one easy, as you can search their online database as well as FINRA’s BrokerCheck online, for free. These resources can be found here:
- SEC’s online database: https://www.adviserinfo.sec.gov/IAPD/Default.aspx
- FINRA’s BrokerCheck: https://brokercheck.finra.org/
While checking to see if the advisor offering the investment in question is registered, keep an eye out for the third red flag: reported problems in the financial professional’s background. These can include things like termination, failed industry qualification examinations, numerous bad reviews, etc. While an investment professional might be in good standing with their current institution, an unsavory past will say a lot about what they’re likely to do in the future.
Pushy Sales Tactics
A fourth flag to be aware of is the pressure to invest NOW. No investment professional should ever push you to make a quick decision or a decision on the spot. You are entitled time to do your own research.
The Free Meal
And last but not least, the final flag we see all the time – free meals. Be very wary of “free dinner” seminars you’re likely receiving in the mail. More often than not, these dinners are not meant to educate, but to sell investment products. Should you decide to attend one anyways, we recommend going into it knowing not to open any accounts during the actual seminar. Follow up the seminar with plenty of your own research – and don’t be surprised to get high-pressure calls from the investment representative in the days after your free meal.
If you ever have suspicions about an investment, do not hesitate to contact the SEC Office of Investor Education and Advocacy. The last thing you want is your hard earned money going to waste!